JKL Co. acquired 25% of the 500,000 shares of outstanding common stock of XYZ In
ID: 2422477 • Letter: J
Question
JKL Co. acquired 25% of the 500,000 shares of outstanding common stock of XYZ Inc. on December 31, 2014. The purchase price was $3,600,000. XYZ declared and paid $1.20 per share cash dividends on June 18, 2015, and on November 29, 2015. XYZ reported net income of $1,200,000 for 2015. The fair value of XYZ common stock was $27 per share at December 31, 2015.
(a) Prepare the journal entries for JKL Co. for 2015, assuming that JKL cannot exercise significant influence over XYZ. The securities should be classified as available-for-sale.
(b) Prepare the journal entries for JKL Co. for 2015, assuming that JKL can exercise significant influence over XYZ.
(c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2015? What is the total net income reported in 2015 under each of these methods?
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Explanation / Answer
To Divdiend income(500,000@25%= 125,000 shares
125,000*1.20 = $150,000
Under avaialble for sale investment will be reported at $3,600,000 in the balance sheet
1)Available for sale = 125,000 *27 = $3,375,000 is fair market value
So 3,600,000 - 3,375,000 = $225,000 unrealised gain
2) for equity method $3,600,000 +300,000 - 150,000 = $3,750,000
under equity method 3,750,000 - 3,375,000 = $375,000
in balance sheet it will be shown at 3,600,000 - $375,000
Avaialble for sale $3,600,000 to cash $3,600,000 Cash 150,000To Divdiend income(500,000@25%= 125,000 shares
125,000*1.20 = $150,000
150,000 Unrealsied gain or loss $225,000 to Avialable for sale securities $225,000 b) investment $3,600,000 ot cash $3,600,000 Investment 300,000 To investment inomce 300,00Related Questions
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